10 Types of Business Loans in India

Securing the right kind of financing is essential for the success and growth of any business. In India, there are various types of business loans available to meet different financial needs. Whether you are starting a new venture, expanding operations, or managing day-to-day expenses, understanding the different types of business loans can help you choose the right financial solution. This blog will explore ten types of business loans in India, along with the distinctions between short-term and long-term business loans.

Types of Business Loans in India

1. Term Loan

A term loan is one of the most common types of business loans. It is a lump sum amount provided by lenders, typically repaid over a period ranging from one to five years. The amount offered depends largely on the credit history of the business. Term loans are generally used for significant capital expenditures, such as purchasing equipment or expanding business operations. Borrowers need to specify the purpose of the loan when applying.

2. Start-up Loan

Start-up loans are specifically designed for new business ventures. These loans are tailored to cover the initial costs associated with setting up a new business. Since start-ups may not have an established credit history, lenders base their decisions on the projected turnover and potential of the business. These loans help new businesses gain the necessary funds to start operations and grow.

3. Working Capital Loan

Working capital loans are used to manage the daily financial needs of a business. They are particularly useful for addressing short-term financial crunches, such as covering seasonal expenses or unexpected operational costs. These loans are ideal for retailers, traders, manufacturers, and businesses involved in import and export activities.

Also Read: Working Capital: Meaning, Importance & Advantages

4. Business Loan Against Property

A business loan against property is suitable for businesses requiring large amounts of capital, typically over ₹50 Lakhs. These loans are secured by mortgaging commercial or residential property. The lender can provide up to 70% of the property's value, with tenures extending up to 20 years. It's important that the property is free from any legal issues to avail of this type of loan.

5. Invoice Financing

Invoice financing, also known as invoice factoring or invoice discounting, is a form of business loan that helps businesses manage cash flow gaps. It involves borrowing money against outstanding invoices. This type of loan is particularly beneficial for small businesses facing delays in receiving payments from clients. Once the invoices are paid, the business repays the loan.

6. Equipment Financing

Equipment financing is ideal for businesses that require expensive machinery or equipment for their operations. This type of loan allows businesses to purchase or lease equipment while using the equipment itself as collateral. It's especially useful for manufacturing businesses that need to keep up with technological advancements and new machinery.

7. Business Loan for Women

To encourage women's entrepreneurship, several financial institutions offer business loans specifically for women. These loans come with favorable terms, such as low interest rates, flexible repayment options, and fast processing. The Government of India also supports women entrepreneurs through various schemes designed to promote small and medium-sized enterprises (SMEs).

8. Business Overdraft

A business overdraft is a facility provided to businesses with fixed deposits in a financial institution. It allows businesses to withdraw more money than what is available in their account up to a certain limit. Interest is only charged for the amount used. This type of loan is useful for managing short-term cash flow needs.

9. Business Credit Card

A business credit card is a convenient way to manage short-term financial needs. It provides immediate access to funds and comes with benefits such as cashback, reward points, and insurance covers. However, business credit cards should be used wisely as they often come with high-interest rates.

10. Cash Advance for Merchants

Merchant cash advances provide businesses with capital based on their daily credit and debit card sales. This type of financing is useful for businesses with consistent card sales and is repaid through a percentage of daily transactions. It's important to ensure that the business has a healthy cash flow to manage repayments.

Short-term vs. Long-term Business Loans

Short-term Business Loans

Short-term business loans are designed to meet immediate financial needs and are typically repaid within a year. They are ideal for businesses needing quick access to cash to manage operational expenses, inventory purchases, or unexpected costs. Short-term loans often have higher interest rates due to their shorter repayment period and are useful for addressing urgent financial requirements.

Long-term Business Loans

Long-term business loans are suitable for substantial investments and are repaid over several years, often up to 20 years. These loans are used for significant capital expenditures such as purchasing property, expanding operations, or investing in large equipment. Long-term loans usually come with lower interest rates compared to short-term loans due to the extended repayment period. They provide businesses with the stability needed to undertake large projects without immediate financial pressure.

Wrapping Up

The need for funds in a business can arise at any given point in time. Understanding the different types of business loans in India can help you choose the right financial solution based on your specific needs.

Whether you need a short-term business loan to manage daily expenses or a long-term business loan for major investments, the options available cater to various business requirements.

Also read: Apply for business loan

Carefully assess your needs and capacity to service the loan before making a decision. Selecting the appropriate business loan will ensure your business has the financial support needed to grow and thrive.